COVID-19 second phase is still an evolving situation in India and its impact on the economy will depend on how long it lasts. But to some extent, it will hamper the recovery that was taking place in the Indian economy, Shailendra Kumar of Narnolia Financial Advisors said in an interview with Moneycontrol's Sunil Shankar Matkar.
He feels pharma and IT would continue performing better this year too but autos may struggle. Pharma and IT are the structural stories for India, he believes.
The Chief Investment Officer at Narnolia Financial Advisors said the current estimate for Nifty FY22 is around 720 and this may see a 5-7 percent cut.
Q: Do you expect the first quarter earnings to get impacted by fast-rising COVID-19 infections and will that impact full year earnings growth as well?
There surely will be a negative impact on the corporate earnings of Q1 FY22 due to fresh uncertainties arising out of the second wave of the pandemic. Indian corporate earnings for the previous two quarters had been ahead of the expectations. Net profit margin of Indian corporate that was declining consecutively since FY17 has been showing a sharp rise during the last two quarters and for FY21 Indian corporate profit growth has been ahead of the nominal GDP growth. But fresh lockdown creates uncertainties.
Also, there are some indications that NPA provisioning for most of the banks may remain elevated for the next two quarters thereby impacting overall FY22 earnings. The current estimate for Nifty FY22 is around 720 and this may see a 5-7 percent cut. But structural cost optimization undertaken by Indian corporate and the revival trend that we saw during the second half of FY21 indicates speedy recovery once the second wave of coronavirus subsides.
Q: Do you still expect double-digit GDP growth in FY22?
COVID-19 second phase is still an evolving situation in India and its impact on the economy will depend on how long it lasts. But to some extent, it will hamper the recovery that was taking place in the Indian economy. Though as of now core sectors like metal, cement, mining are reportedly working 100 percent, consumer discretionary space is seeing a lockdown impact. Looking at various structural shifts taking place, we still continue to believe double-digit GDP growth for FY22 though that would be lower than 12-13 percent expected before the second wave of the pandemic.
Q: What should investors buy if the fall continues?
Barring the cyclical blip that coronavirus is causing, the Indian economy is on a structural improvement path. The pain of formalization of the economy is behind us and going forward would be the time when we will reap the benefit of the formalization of the economy undertaken over the last five-six years. There are other structural factors like - China Import Substitution, Production Linked Incentive Schemes, and higher digitalization. We are also of the view that in an incremental sense the pace of NPA creation has substantially reduced for the banking sector.
In terms of valuation, we are trading around 18 times FY23 Nifty EPS. So, the current decline would be providing investors with another great opportunity to invest. One should prefer companies with a strong management pedigree and rising return ratios.
Q: Do you expect the currency to weaken further and hit its record low levels in the coming weeks? Will it impact the FII flow too?
Till a month ago, the rupee was showing strong tendencies of strengthening due to persistent high FDI and FPI inflows and RBI was frequently intervening to arrest sharper appreciation of the rupee. That trend has reversed in April and now the rupee has depreciated back to 74-75 levels against the US dollar. If short-term FPI outflow happens, then there will be some more pressure on the rupee but high levels of currency reserves with RBI and its resolve to keep currency volatility to the minimum will ensure orderly movements.
Q: Since the beginning of last lockdown, auto, pharma, IT and metals witnessed triple-digit gains. Now with the beginning of a new lockdown like situation, can you name the sectors that can give triple-digit gains in next April 2022 and why?
In terms of sectoral performance while pharma and IT would continue performing better this year too, autos may struggle. Pharma and IT are the structural stories for India. India is now recognized as the pharmacy of the world and this will further boost the penetration of Indian pharma companies globally. Also, the heightened pricing pressure that Indian pharma companies witnessed in the past is over. API dependency on China will also decrease gradually improving the broader Indian pharma story.
Improved digitalization is helping the Indian IT sector in a big way. Indian IT companies are getting strong order bookings, stable double-digit sales growth, and improved margins.
In metals, companies that would be de-leveraging faster look good. A new sector that should show strong performance towards the second half of FY22 would be banks once economic normalcy comes back.
Q: Can you name the sectors that one should completely avoid now and why?
Consumer Discretionary space looks vulnerable. Post the first round of COVID-19 related stress different parts of the economy were recovering at different paces. Some parts of the economy were still suffering post-COVID stress. And now with the second wave, there are worries that broad consumer behaviour at least in the short term may change significantly.
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